Chileans Raid Retirement Cash, Yanking Billions of Dollars

Chileans are gearing up for a second round of early pension withdrawals after tapping $17 billion in retirement funds to buy consumer goods and pay off debts when a similar measure passed earlier this year.

The senate will vote on a bill granting fresh access to pension money amid the coronavirus outbreak as soon as Thursday, while separate, government-backed legislation could be reviewed later in the day. If one of the proposals becomes law, as is expected, total withdrawals may drain some $30 billion of the $200 billion held in the funds.

Chileans Raid Retirement Cash, Yanking Billions of Dollars

While the changes were designed to ease the economic impact of the pandemic and lockdown, they are also part of a broader fight for the future of Chile’s privately-run pensions. The current system, introduced during the Augusto Pinochet dictatorship, has been targeted by protesters over its low payouts to retirees. Detractors see it as a cause of inequality in an investment grade country able to spend more on its people, while investors say the funds are the bedrock to the nation’s burgeoning capital markets.

“There is a broad sector of the population that doesn’t want the current pension system,” said Cristobal Huneeus, a partner at data science consultancy firm Unholster who was previously an adviser to both the Labor and Finance Ministries under former President Michelle Bachelet.

Elsewhere in Latin America, Peru passed a law this month allowing for a second round of pension withdrawals, while Mexico is also considering changes to its retirement funds. Under existing rules, Mexicans can tap part of their pension savings if they become unemployed.

Broad Support

In Chile’s case, congress defied opposition from President Sebastian Pinera‘s administration and approved the first pension withdrawal bill in July. The measure enjoyed broad support that included votes from lawmakers in the government’s own coalition.

Within hours of the bill’s passage, workers flooded the offices of the private pension companies, lining up for hours in the cold weather even as the virus outbreak raged. Citizens used the money to buy items such as cars and appliances, as well as to make down payments on homes.

Chileans Raid Retirement Cash, Yanking Billions of Dollars

Opposition lawmakers later introduced legislation that would allow a second round of withdrawals. This time, the government responded by vowing to challenge that bill’s legality in the nation’s constitutional court and by pushing forward its own, more limited proposal.

“This is a one-time policy that can’t be repeated,” Finance Minister Ignacio Briones said about the government-backed bill earlier this month. “If we make it permanent, we’ll be left without any pension money.”

Should the opposition proposal be approved by the senate, it would have to go through the constitutional court in a process that could take about a month. Meanwhile, any changes to the bill that was previously approved by the lower house would return the legislation to the Chamber of Deputies for fresh debate and votes.

Growth Impact

Amid the virus outbreak, Pinera’s government has pledged emergency aid worth 12% of gross domestic product, with measures including low-interest rate loans and job protection programs. Still, the pension bill has stood out for its direct impact, driving stronger-than-expected growth in the third quarter and will add 1.2% to GDP alone this year, according to the central bank.

Chile’s Finance Ministry expects the economy to shrink 5.5% this year before rebounding 5% in 2021.

Chileans Raid Retirement Cash, Yanking Billions of Dollars

In the meantime, there is a consensus that the retail industry would by the primary beneficiary from new withdrawals. BTG Pactual’s asset management unit is overweight on both Chilean retailers and banks on hopes of a “gigantic” stimulus from the pension funds.

Pensions will be a hot-button topic as the country rewrites its constitution and holds presidential elections in 2021 with unemployment rates remaining high.

©2020 Bloomberg L.P.

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